Recently I-Bonds have received a lot of press. It makes sense in this low interest rate environment why they would be talked about-a government bond paying an annualized rate of 7.12%! However, it is important to understand the mechanics of these bonds because this 7.12% will not last for long and there are several moving parts and restrictions with I-Bonds.
Where to purchase I-Bonds
I-Bonds can be purchased online from Treasury Direct (www.treasurydirect.gov). The interest rate on I-Bonds has 2 components-a fixed rate and an inflation rate. Both rates are adjusted in November and May of each year. When you purchase the I-Bonds, your fixed rate remains unchanged for the life of the bond. The inflation rate changes every 6 months. The November 2021 inflation rate is 3.56% for 6 months (annual yield would be 7.12%). The fixed rate remains at zero.
The maximum amount of I-Bonds that can be purchased in a calendar year is $10,000 in electronic bonds and $5,000 in paper bonds using your federal income tax refund. The limits apply separately. To put this into real numbers with the November 2021 rate, we are talking about $534 of interest on a $15,000 purchase.
Interest on I-Bonds
The interest on I-Bonds can be deferred until you cash the bonds in. I-Bonds earn interest for 30 years and are not taxable in the state, only federal taxes. There is a 12 month minimum hold and if you redeem the bonds before 5 years, there is a penalty of 3 months of interest.
Financial Journey LLC is a registered investment advisor offering advisory services in the state of Virginia and in other jurisdictions where exempted. Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.